Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group.

While a lot of media coverage and political rhetoric has been exhausted on Public debt (fiscal deficit), what is more important for the reduction of other three deficits mentioned in the article is the high private debt and continued deleveraging by private companies and households since the financial crisis. This trend is sure to continue in near long term and hence there is little hope that aggregate demand is going to go up any time soon. This in turn will translate to current high unemployment numbers close to 8%.

FED’s QE measures in recent times have tried to address this loss of aggregate demand through their policy of monetizing private sector debts (buying MBS). These measures arguably had low to no success rate in terms of getting the economy on track. What is required is prudent fiscal policies and tax reform, just one of the many required fiscal policy changes, has received highest public scrutiny and attention.

Mitt Romney’s tax policies, as presented, are incomplete and fail to answer many of the key questions. When it comes to Corporate taxes, it is true that 35% corporate tax is one of the highest in the world but it is also true that the marginal tax rate for all companies in S&P 500 is 32.8%. (Source: nytimes article). Also the article reports “Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years”. So there are tax loopholes which allow these companies to pay way lower marginal tax rates than the stipulated 35%. Thus without clarifying how many of the current loopholes in the tax code would be closed, this proposed tax reduction statement is vague.

Also it is questionable, whether only lowering income taxes, capital gains and dividend income taxes(leaving carried interests and other exquisite taxes outside of scope), without accompanying structural reforms in labor markets, increased infrastructure spending, reduction of bureaucratic red tape and education reform, will spur economic growth and aggregate demand. In absence of better business and investment environment any surplus money from tax relief in the hands of households would be directed to deleveraging.

Another fundamental question that needs to be answered related to the argument “lower taxes means higher investment / better employment” is the behavior of rent seeking by investors, speculators and financial institutions. A small example of this is between July 2012 and present the DJIA has rallied to pre-crisis 2007 levels. However the real earnings for the DJIA components have not moved up significantly. So an individual investor have benefited from the FED intervention more than anything and his investments have not contributed to increase in real output.

Thus a lot of this political rhetoric from both sides of the great divide remains inconclusive in proving their ability to bring things back to normal (if we think that 2007 economic indicators with big asset bubbles were the normal).

You are spot on that any tax reform has to be revenue neutral especially in these fiscally constraining times. But revenue is only one side of the coin. The other side to taxes is “perverse incentive” factor which encourages some behaviors while discouraging some others. For example high excise on tobacco and alcohol is used to reduce the negative externalities on health. Similarly reducing marginal corporate tax rates while closing loopholes can not only be achieved in revenue neutral way but the will also provide added incentives to corporations with huge cash on books of offshore subsidiaries, to repatriate a lot of that money. Another example of perverse incentive that springs to mind is if the Bush tax cuts expire, the huge differential in the Dividend Income tax rate and Capital gains tax rate (43% vs. 24%) would not only distort investment decisions by individuals and dividend payout by firms but will also affect the supplementary retirement income of seniors. So any tax reform debate in my opinion should be bipartisan and exhaustive to consider all the implications.

Again, you are correct on the partisan nature of the economic policies and I think a big reason for that is “Supply side” policies would need structural reforms, which the polity tries to shy away from. The US economy has reached a threshold where the Real Assets to Financial Assets ratios is about 3 to 7. Also historically over last 30 years Financial Assets with long stream of expected future cash flows have outperformed the Real Assets. This was due to credit expansion as the Expected Future Cash Flows from these instruments were discounted by interested rate and yield spread. As interest rates went down yield spreads became thinner making long maturity and leverage highly lucrative. Now the interest rates cannot go any lower and inflation is at 2%. So can stocks or bonds be expected to yield their historic 7 – 8%? Also post crisis and with technical innovation most Financial Intermediaries are left with excess capacity and increased productivity making it difficult for them to absorb more people in their workforce. This is evident from Banks slashing employees regularly.

So to get the Economy back on track Real Growth is the only available option. But that is constrained by Fiscal deficits and High debt to GDP ratios. Supply Side reengineering is the only available option but would need strong commitment from Polity and Electorate.

Nice comment Partha. I believe that more efficient tax policies would work independently of the other reforms that you mentioned. The overall tax on capital returns should be "revenue neutral," that is as close to what is needed to support government spending and account for low or negative tax rates on lower income individuals and households. However, given that corporate income is taxed twice, the effective tax on capital returns is closer to 50%. True, there are many loopholes, but it is the rate on the marginal investment that determines whether it will be undertaken or not.

Also, your point on household deleveraging is spot on. We used to be able to count on the public to take on ever more debt to support their spending. We have clearly reached the end of the ability of consumers to take on more debt. Decreasing the cost of capital at the margin at least offers hope that increased investment will drive more employment and corresponding consumption. Demand-side policies seem to be ineffectual. I am not exactly sure why there is an ideological and partisan element as to which policies are favored, or why "supply-side" seems to be the province of conservatives.

This is yet another example of a highly rated Ph.D economist resorting to the kind of ideological, opinionated, sloppy thinking that would result in an economics student being verbally crucified in the class room.

How is it that reducing the cost of capital by lowering marginal tax rates, maintaining the 15% rate on capital gains and dividends and lowering the corporate tax rate to 25% will not result in more investment and hiring? Resorting to comparing the economic results in the Bush administration to that of the Clinton years is simplistic and anecdotal. After all, President Clinton did not have to contend with a stock market that lost half of its value after the dot com bubble burst, a recession that started when he took office, the 9/11 tragedy which profoundly impacted the airline and transportation industry, and the dramatic increase in cost of oil throughout the decade.

As economists say, "all other things being equal...," there can be no doubt we were better off with lower taxes on capital than higher taxes. To suggest otherwise is to deny that the law of supply and demand applies to capital and labor.

I do agree that lower taxes on capital will result in a higher concentration of income. However, you cannot accumulate that wealth without reinvesting the returns to grow the business, thereby producing more goods and services,hiring more people and increasing demand. Why should we care that others get rich from our good fortune?

Excellent article. So it seems that Romney and Ryan are proposing to take most cuts from only a specific 8% of proposed Federal annual spending budget. This 8% amount is the amount that includes most if not all of any federal spending that actually contributes directly to support citizens of the nation. At the same time, the tax changes proposed by Romney and Ryan will significantly increase the annual tax burden of only citizens earning less than $200,000 annually. To me, there are definite negative implications then for any continuance of financial survival for the majority of US citizens (taking a long-thought-leap- with generalized conclusions). Even if Romney and Ryan win this coming election, God sure isn't going to lift a finger to support the majority of US citizens. Are the Democratic party proposals any better if a Republican majority Congress does not support any Democratic proposal- just because, and primarily only because a proposal is a Democratic plan? Can Obama really propose any effective alternatives? Who, bottom line, really pays what percentage of taxes. How much tax revenues are really essential to support the Federal "public good" expectations of citizens within the nation? How balanced are "public good" expenditures from one state to another within the nation? Perhaps if there were significant reductions in salaries within corporations of top corporate individuals, and significant reductions in salaries of members of Congress, and significant reductions in ALL entitlements, such as pensions, paid personal expenses etc. etc. etc. to members of Congress(families and friends), then there may be a higher allocation than "less than 8%" of the Federal budget for general expenditures to improve opportunities for the majority of US citizens.

I also interpret that "Federal monies" are being allocated within other categories to specific interests that only benefit specific corporate interests that specific members of Congress support, primarily to maintain their political career and personal entitlements. So what is the annual percentage of Federal monies that can be allocated to Congressional salaries, retirement benefits? What are the monies that support programs/expenditures that specifically benefit those connected to Congressional members (active or retired), and specific corporations? Is this percentage a more significant percentage of the annual Federal budget? Shouldn't the majority of the expenditures of the Federal budget actually be ONLY for the direct support of US citizens, and not just Congressional members and associates(I'm either presuming or assuming that the monies amount to well over less than 8% of the annual Federal budget)? What should the monies be used for? Are the main reasons for Federal expenditures Defense and Support of the nation, especially the citizens? The members of Congress and associates should be volunteering their time to their nation and the citizens that they supposedly represent as members of the Congressional House and Senate. Most Congressional members are extremely wealthy, or became extremely wealthy after terms in Congress. Why should these positions be paid positions? Presently, I interpret that the members of Congress, and perhaps the Presidency and Judiciary, expect all other citizens to donate all time and efforts to support any kind of Federal government representation, even a totally irrelevant representation. The present kind of representation is definitely not in the best general welfare interests, or the for-profit interests of the majority of US citizens or the US, as a nation.

There is a surplus! The US is making huge tax expenditures to the top .1% of one percent so that the "wealth creators" are in surplus. Can good times be far behind?

Sheldon Adelson is announcing a gigantic development project in Madrid Spain (your tax dollars at work!).

Next January, the US Senate is going to come back with the political balance of power held by senators elected by Karl Rove's Crossroads PACs. Reactionaryism in the Senate has been made national rather than rooted in individual state politics. So the Republican senators will all be beholden to Karl Rove. So now we will have government by stooges of Karl Rove. (Remember how well it worked when he had his stooge in the Oval Office!)

Whatever ones political priorities, why is it that the overspending, underperfoming economies of the US and UK (and others) believe the one cost that cannot be reduced is the military. God knows there is little point in invading either country, and since we seem incapable of managing our own domestic budgets to effect why would we want to use our military to widen the influence of self evidently in effective economic management?

The US reduced its military by 30 percent after the Cold War. Most likely, starting next year, the US will start another 30 percent reduction since a lot of Army and Marine divisions will no longer be needed since further invasions of Moslem countries will probably be off the agenda.

This outcome was foreordained by the first Bush administration when it (1) passed large tax cuts (2) significantly increased the pay and benefits of military personnel, particularly career personnel, and (3) passed a trillion dollar unfunded prescription drug benefit. Numbers will drive the force reduction.

Apart from the fact that neither Romney's nor Ryan's proposals perform in net any explicit deficit-cutting, (and due to their quite explicit tax cuts seem to make this deficit far worse), this piece buys into the Republican frame that the fiscal deficit is bad.

It isn't. The deficit is the only thing between us and a depression, and needs to continue just as long as we have net trade and savings deficits, and high unemployment. It presents no long-term problem, either, whether in solvency terms (we owe this money to ourselves, we print it ourselves, and bond holders are savers anyway), nor in inflation or funding terms. When inflation is a problem, we can then address it with deficit cuts and all will be just fine. This is basic MMT economics.

Surely the professor is being facetious when she compares the Bush years to Clinton years to argue that tax cuts are ineffective stimulus.

If she believes her own example, she must conclude that tax increases are in fact an economic stimulus.

Similarly, she must recommend that we immediately move to deregulate financial services since this is what Clinton did. (Clinton ensured that derivatives would not be regulated and he revoked Glass-Steagall).

A single comparison proves nothing.

Why not choose other examples? Why not look at the recovery after 1982 when Reagan cut taxes?

Actually this might be the case. It’s not highly scientific but using numbers from TradingEconomics.com I put together a list of almost 30 developed nations comparing their highest marginal corporate tax rates and unemployment levels . The scatter plot and regression analysis suggests a negative relationship. Taxes down and unemployment up. Or put differently raising taxes lowered unemployment. At least in this single slice of time. In the future I may check other periods or even, given time create a long term trend of the R^2 value to look for times/conditions that low taxes may be more significantly linked to high employment. This does not address how that tax revenue is spent.

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